BioCentury

Pause for politics

by Amran Gowani, Senior Editor, Finance & Business Development

The near record-setting pace of 1H18 capital markets activity isn’t likely to be replicated this half, but that won’t be because of changes to sector fundamentals. Instead, it’s likely the consequence of macroeconomic and geopolitical market uncertainty coupled with a calendar that leaves fewer available days to execute deals.

The confidentially filed IPO queue remains full of high-quality candidates that bankers said should have no problem getting out. And there isn’t any lack of capital. Despite missing buyside expectations, M&A activity in 1H18 recycled more than $50 billion into the space and has provided investors with plenty of dry powder.

But finding hospitable market conditions coinciding with windows where investors aren’t all on vacation will be a challenge. Volatility stemming from the Nov. 6 U.S. midterm elections will add to an increasingly chaotic macroeconomic and geopolitical climate.

The fourth quarter thus promises to be the slowest of the year, following what’s already expected to be a quiet summer season after a burst of IPO financings in June (see “Bountiful, Not Bubbly”).

NASDAQ deal flow will largely be restricted to a tight window between Labor Day and Halloween, with bankers conservatively forecasting 10-20 new biotech listings in the back half of the year. By contrast, 1H18 saw 30 biotech flotations on NASDAQ.

Six companies are in the queue for IPOs on Hong Kong Exchanges and Clearing Ltd.’s (HKEX) new biotech chapter, and nearly a dozen pre-revenue or pre-profit biotechs with a Chinese interest are expected to list on the chapter during its first year (see “Hong Kong’s New Chapter”).

But macroeconomic concerns may get the chapter off to a sluggish start.

Global follow-on demand is expected to remain strong next half but could see a slowdown given the dearth of value-inflecting clinical catalysts coupled with the regular dampening caused by the holiday season. Achieving milestones remains a prerequisite, as purely opportunistic financings see limited interest or require hefty discounts (see “Eyes on Launches”).

Plethora of elites

Global biotech IPO financings in 1H18 reached an all-time high for a first half. The cash haul in 1H18 was $5.2 billion, narrowly topping the $5 billion raised in 1H15 that bankers and buysiders acknowledge was a bubble.

Yet seven bankers who spoke with BioCentury weren’t surprised by the amount of deal flow and don’t see any worrying signs of froth. For one thing, it remained the case that only top-tier biotechs could secure public capital (see “Elites Always Welcome”).

Leerink’s Gabriel Cavazos said the vast majority of biotechs that floated in 1H18 would have been attractive to investors in any market.

“For the highest quality companies there is no IPO window,” he said. “They’re engineered to get out: they have great VCs, marquee crossovers, great technology and proven management teams.”

“For the highest quality companies there is no IPO window.”

Gabriel Cavazos, Leerink

Evidence of this came over the last three weeks of June, when 13 biotechs raised $1.5 billion on NASDAQ. All the companies priced within or above their expected ranges, and the median after-market performance for the cohort was a 22% gain.

“What’s remarkable is that investors didn’t push back on the volume,” said one banker who wished to speak anonymously. “They were happy to have a whole bolus of exciting companies to invest in.”

All the bankers polled by BioCentury said VC backing and crossover rounds give the privileged class ample financial firepower and the mark of quality, opening the door to the public markets.

“The biggest determinant of how the IPO prices is the investor syndicate going into the deal,” said Annette Grimaldi of BMO Capital Markets.

“These VCs are not shirking or backing out of the business,” added the unnamed banker. “It’s the opposite -- they’re gaining momentum and getting bigger funds.”

Advances in fields such as immuno-oncology and cell and gene therapy have sparked a surge in venture investing since 2014. Global venture funding levels totaled $9.2 billion in 2014,...